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The Clark Howard Podcast
05.19.26 Ask An Advisor With Wes Moss
00:29:10
10 Essential Duties of a Real Fiduciary Financial Advisor (It’s Not Just Investing)
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- [00:00]
Wes Moss
Foreign.
- [00:05]
Krista DiBias
Welcome to this week's Ask an Advisor. I'm Krista dibias here with Mr. Wes Moss. Hi, Krista, how are you today?
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Wes Moss
I'm good. I'm excited for today as I usually am. Yes, usually I'm excited about this.
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Krista DiBias
If you have a question for Wes, I'm going to get to those questions soon. You go to wesmoss.com ask we have our form there. And if you're wondering how to spell wesmoss, it is behind him on YouTube. It's W E s M O S s Very complicated.
- [00:33]
Wes Moss
And I've done radio. This, obviously we're in podcast format here, but I've done radio for almost 18 years now and I still hosting the same show at the same time on the same day for almost 20 years and people still will write me or call and say, hey, Russ.
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Krista DiBias
Oh, Russ.
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Wes Moss
I guess it does. Maybe it's my, like, maybe it's my speech impediment.
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Krista DiBias
You need to buy russmoss.com and forward it to your website.
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Wes Moss
But it is Wes, which I guess can sound like Russ. Wes Moss. I think that's what it is, the full thing.
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Krista DiBias
So today, back in April, we did do a podcast and one of the segments you did was what's the difference between a fiduciary financial advisor and a non fiduciary. And a lot of people had questions about that. A lot of people gave us feedback like, well, I'm, I'm not going to use an advisor. Which is fine. A lot of people choose not to. But then several people have more questions about what an advisor should, should not do for it could do for you. And so I know you're going to break that down for us in two different parts today. So we want to make sure you're getting your money's worth if you are using an advisor. And then we're going to get to your questions, of course.
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Wes Moss
Well, good. So let's start with that. Just a very quick revisit. And I almost did that segment a couple weeks ago so that I could understand this better because I get questions about it a lot. And it's one of the hardest things to describe. And that's why I came up with the analogy of the two orange peppers. They look almost identical in the bin. Both orange, they're both medium sized. They both look the same. One is a habanero and one is a bell pepper, which obviously, as we all know, in the kitchen, that's a big difference. Big, huge, big difference. One is the fee only advisor that is A fiduciary one is the financial advisor. One follows the rule of prudence, which sounds a lot like the best interest. But again remember they're very different kinds of peppers and then not necessarily one is better or bad per se. I obviously believe in the fee only fiduciary where there is not a commission based relationship as does Clark. But again there are some places where advisors that use commission may be appropriate. It's just that's not my thing. But I have a lot of friends in the industry so I don't want to be overly punitive to any one category. So that's my politically correct answer. But the question I think today is more about what can a fiduciary fee only advisor do for you? And I'm going to give you us a list of 10 today to think about. And if you're using someone to ask about and know that these are all categories that are on the table beyond doesn't a financial advisor just help you invest your money? What else does a financial what else are you supposed to do? Aren't you supposed to tell me what Stockstone or ETF Stone? And the answer is that is a part of it and it's obviously a super important part of it. But there are at least these 10 categories. They're really arguably a lot more. But we're just going to do 10 today. I'll do five and five. And most importantly about all of this, every category is important, but someone using an advisor may not need this category at a particular time, but you may at some point in the relationship over time. And then most importantly after you know these, let's say these 10 areas, I think the hardest job and maybe the most important job of a fee only fiduciary advisor is to be able to connect all those dots together as opposed to here's what we need to do for taxes, here's what we need to do for real estate, here's what we need to do from investments. It's really about you being able to be educated and understand how all those pieces fit together. When you feel that way, then I think you have the peace of mind and the sleep well at night that we are all looking for. That's why we're educating ourselves on markets and investing and what to do because we want to be able to feel at peace with the topic that is perhaps the most emotional and scary topic beyond health in our lives, which is our money. So let's put it all together. Here are the 10 things beyond investing. Now investing is one of them. Of course. But we'll start with tax strategy. We talk a lot about that here on the show. Tax strategy. Knowing in a given year what your income is and what that means for your tax rate relative to the moves you may be making in your portfolio. What kind of capital gain rate do you have? Because your income is highly, your capital gain rate highly dependent on what your income is. But when you take capital gains, it also impacts your income. So it's really important to understand from a tax strategy standpoint where your income is going to come in approximately in any given year. And doing a little bit of planning there can go a really long way. Number two, real estate copilot. You may not be doing real estate transactions every year, but real estate comes into the picture over and over and over again. And for most Americans that have accumulated wealth, a big part of that is in their primary home with home ownership. So there's a lot of strategy around figuring out either when to pay off a mortgage, if you're going to sell a home, and if you're going to move. What are the again, tax implications look like from real estate? Number three, business and career strategy. And I think that as I've gotten older and I've been doing this for over 25 years, that is a big part of it too, because I think the families that I see and other advisors work with that are in their last big stretch, they're in their most important five to 10 years, their highest earnings years, and things get complicated and you've got stock options. And as we can see from a lot of the questions we get here, I've got this plan to choose from and this plan to choose which is a better deal. I'm thinking about moving companies because this may be an overall better package or maybe I should stick around and not do that. So there's a lot to do with figuring out is your job the right place for you and is your career keeping you on track financially? If you are a business owner, number four on my list is business exit planner. You could be an entrepreneur and have a business and maybe save a little bit of money over the years, but maybe most of that money gets plowed back into the business. But you look up 20 years later, 30 years later, and all of a sudden, wait a minute, my private business is kind of worth a lot of money. This is my retirement. Think about all the strategy that goes into trying to figure out when to sell, who to sell to, and then the implications of doing a sale and what kind of sale. So think about there's a lot to do with that. I would say number five here on this list, retirement cash flow architect. And that is a very simple but straightforward way of doing planning and putting in the big variables that you're going to forecast out of the future. I want to spend X amount. I have X amount. I'm saving X amount per year. If that is the case and I continue to do so, doesn't mean you can't change it. What is it going to look like in 10 years or 15 or 20 years? And that cash flow analysis is super helpful.
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Krista DiBias
Okay, we're gonna go to some questions now and then we'll hear the other five later on in the show. This first one's from MJ in Kansas. Wes, Love the show. I know you aren't a fan of rigid rules of thumb, but as one of the few voices who champions dividend investing, I'd love your take on the best execution. Currently, I hold a selection of individual dividend kings and aristocrats in my taxable account. Companies I believe have decades of staying power. However, I'm questioning the architecture. Is picking individual stocks the right move or should I be at dividend ETFs instead? Also, is a taxable account the most efficient home for this strategy? Could you rank the ideal account types for dividends and provide a few itineraries or frameworks for how a long term dividend investor should structure their portfolio?
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Wes Moss
MJ I like the idea of itinerary. I think that the short answer here is that ideally and in a perfect world or in a vacuum, and we don't live in vacuums. So these are just these. When I say ideally or in a vacuum, it's you lean towards these ideas, but they don't. They may make a lot of sense, but they may not work all the time for every situation. In fact, a lot of times they don't. So it's understanding why this might make sense. And what I'm saying here is that typically you would want your qualified dividend paying companies, whether ETF or individual, which I'll get to in a second in your after tax account because you get the benefit of the lower tax rate, a qualified dividend rate, it should be the same as your long term capital gain rate, which is tax favorable relative to what is usually the higher rate, which is your ordinary income rate. So again, in a perfect world these are in your taxable account. What's interesting though is that taxable versus an IRA or retirement account, a retirement account is all it is the crock pot. So you don't pay any taxes until you take money out. Anything that pays any sort of dividends is technically better in the crock pot. So you could say again in a vacuum. Well, that means all my bonds should go into the ira. Well that may not make sense at all if you're an early retiree. So I'm a big believer in balancing allocations more within multiple accounts even though they're different locations as opposed to saying everything that pays an income needs to go over here and if it's tax favored or growth only, it goes here. But again, I would lean towards dividend paying stocks in an after tax account. Stocks are ETFs. I think the short answer is ETFs. I think that exchange traded funds over I used to use IT mutual funds for dividend paying stocks that I transitioned to ETFs. And the reason I say that today is there's so many of them to choose from and you can get all these different varieties of dividend paying companies. It's like you're going into an ice cream shop and you've got an entire choice of different kinds of dividend ETFs, the five year minimum dividend growers, the 20 year consistent payers. He mentioned the or MJ mentioned the dividend kings as an example. So I think that the simple answer is etf yes, you absolutely can own some individual companies. That is fine too as long as you like constantly keeping up with the research around that and making changes if something happens to your dividend payers.
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Krista DiBias
Another food analogy, the ice cream shop. Kelly in Oregon says, hi Wes. My husband and I are in our early 60s. We both work part time. We have around a million dollars in managed assets. It's in a combination of stocks and bonds. We have 150,000 in CDs earning approximately 4%. We're also looking to have approximately $125,000 coming in through the sale of our rental property this spring. Our financial advisor suggests that the $150,000 is too much money to have in CDs. He recommends six months of living expenses which would be approximately $50,000 and invest the rest with him where we would get a higher return. I feel having the large amount of cash available to us would be beneficial if the stock market takes a large drop. It makes me more comfortable to know that we have access to a large amount of cash which we could utilize for possible larger expenses until the market comes back. What's your take, Kelly?
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Wes Moss
This is one of these rules of thumb that they're good guides but the answer is not necessarily what your advisor is saying. It's what makes you feel comfortable. Because yes, that's a practical way to think about it. Six months. I think of it as a, in a different context, Kelly, which is I like to have safety assets that are for three years. Doesn't mean it has to be in cash, but it should be in something that's paying you either cash money or it's giving you some high yield savings, some interest or fixed income, that is bonds, conservative and safe bonds. We do that because if the stock side, it's not if when the stock side of the portfolio takes a big dip and it's down 20% or 30% in a big correction, three years worth of dry powder usually allows plenty of time for the stock side to recover so that you can be pulling from that dry powder for spending. But when it comes to a cash number, six months is a good guide. But the other thing I find, Krista, is that people do have a sleep well at night round number in their head. And I think that's a powerful thing because again, so much of what you're doing as you're trying to get through this maze of investing is to feel comfortable with it. And having 10,000 in cash for some people, that makes them feel comfortable. Some people, they want 50, some people want 250, some people want a million in cash. Krista, I know that sounds crazy. Wow. But Kelly, for you, if $150,000, which is arguably 15% of the overall portfolio, maybe a little less, if your million is separate than that, as long as it's getting you a decent yield, then I think it gets to count towards the dry powder. And yes, you could always be earning more over time in stocks or potentially more over time. But you got to feel comfortable. And I think safety assets allow you to be a better stock investor so you don't panic when markets are down.
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Krista DiBias
All right. Justin in Illinois says early retirees need to rely on taxable brokerage accounts to fund the early years of retirement. Traditional advice is to have a decent portion of bonds in retirement. How do early retirees manage sequence of returns risk? By having a decent amount of bonds in a brokerage account. And then when general advice is to avoid bonds and target date funds and brokerage accounts because of tax inefficiency.
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Wes Moss
Justin, think about this. If everything in a perfect world, you've got all your retirement money and it's all in a Roth ira, right? Because then you have to worry about no tax implications of what's in the Roth you have to worry about no implications about what comes out of the Roth that's tax free once you get to the right age. And everything inside the IRA crock pot is deferred until you pull money out. So in a vacuum, sure, bonds should be in an ira. Target date fund should be in an ira. Anything paying an income, well, that's a giant part of the investment landscape is paying you some sort of income. And when you sell, you've got capital gains to worry about. But not in an ira. So everything's a little can be. You argue that could be better. But if you're an early retiree, if you're 50, 51, 52, 54, and you don't have access to retirement accounts without a penalty, then why would you want to have all of your dry powder assets in an IRA if you can't get to it, what's the point of having dry powder? So you have 100% in stocks outside of an IRA. Justin Market's down 25 or 30% and you have to pull from that. Well, that negates the whole concept of having the dry powder. So remember, a lot of these rules of thumb sound really good and they do make sense. But when you start applying them to the real world and you're a perfect example, great question and situation. You've got to have some balance in some of the safety assets outside of the IRA to be able to follow that rule for pulling income.
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Krista DiBias
All right, we're going to take a quick break. We'll be right back with part two of your segment and more of your questions.
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Wes Moss
I'm Wes Moss along with the great Christa Dibias.
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Krista DiBias
Oh thank you. I don't know about that great part.
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Wes Moss
Earlier we were talking about the differences between financial advisors and fiduciary financial advisors with the orange pepper analogy. Hopefully that makes sense that it sticks. And then the jobs that a fee only fiduciary advisor could be able to help you with. Or if you're not using any sort of advisor, which again a huge percentage of the population does this on their own. These are still ideas and areas of overall wealth planning financial planning that you want to pay attention to as well.
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Krista DiBias
Sure, that a lot of us just don't think about.
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Wes Moss
So we already covered Tax Strategist, Real Estate Co Pilot Business and Career Strategist Business Exit Planner as as another category and then Retirement Cash Flow Architect which is kind of the core setting the tone and the document for everything else that you're going to do. Again, most importantly, we want to have all these things work together and have them integrated as opposed to just siloed. And it's difficult to have every single piece of this integrated. But the more pieces that can come together in concert I think the better people feel which is one of the areas that we're going to talk about. And that's the behavioral part of investing that is so important so that we can feel as though we can sleep well at night and not be worried about money. Because so many Americans are so worried about money. And statistics show that we're depending on the study you look at more afraid of running out of money than death for some Americans. So number six on my list is the piece that most people think investment engineer or someone that's going to help me look at my overall investments, help me find the right low cost investments and have a balance allocation and lots of diversification so that the investments then are geared towards that cash flow or retirement cash flow plan that you did to begin with. It's also your investment strategy is also meant to help you reach your goals and be able to meet your risk tolerance so that you can live with this plan and feel good about a plan over time. 7. Risk management. This goes back to insurance. The fee only fiduciary because they do not accept commissions unless they're wearing dual hats and most do not is not going to be able to sell you a life insurance policy because they're commission based. But they can review your property and casualty, your disability and suggest who you should talk to or potentially partner with someone in the insurance world if you have more insurance needs. So that's the risk management side of this which is insurance. Number eight, estate and legacy. Which is not something that we want to think about on a daily basis. But we do want to have a will done. We do want to think about where this money that I'm investing for retirement goes. But I'm no longer here. Is it your kids? Is it the family? Is it a charity or multiple charities that are important to you? And an advisor should be able to talk that through with you to make sure that again the bigger picture plan is thinking about the longer term that's even beyond your retirement. The execution of that again is typically going to be or has to be done by an estate planning attorney. I've seen sit I've had situations where families are comfortable doing some of this online on their own and just simple updates of wills. But when it gets to trust and more advanced planning, that's when an estate planning attorney would come in. Number nine, healthcare. We're all worried about healthcare. It's expensive. We know that. So fee only fiduciary advisor should help you be able to make sure you're planning for healthcare and the cost, have resources for advice about Medicare and when in the situation where you're starting to look at either you're looking at continuing continuous care or assisted living or particularly, I think for this audience, for your parents, there may come a time when mom and dad, even though they want to stay in the house and live in their home forever, it may not be safe for them to do so. And when that moment arises, it typically comes up really quickly. So a fee only fiduciary advisor should have resources for you to be able to figure out and find the right community for healthcare and for living for our parents. And then last but not least and something maybe the glue that ties all this together is the behavioral side of what an advisor should be able to do for you or help you with. Whether it's a behavioral coach or helping plan life. There's so much emotion tied to the money that we're saving and the money we're investing and the money that we're relying on for the long term. And it becomes nerve wracking in the world that we live in and markets are volatile and something's changing every day, every hour, every minute. And there's a big function of behavioral coaching that the right advisor for you should be able to help navigate, which goes back to managing really in an ongoing way, your risk tolerance and how that fits all into the investments that you feel comfortable with that are coordinated with all of these areas. And the more that all of the 10 things that we just talked about are put together because there are hundreds or even thousands of decisions, retirement is not one decision. Retirement is hundreds or thousands of little decisions for years and years and years that all have to come together. And all those dots need to be connected. And I think the more that we can do that or you can think about all those dots connecting, whether you're doing this as your own advisor or you're working with an advisor, I think the better you will feel, the more confidence you'll have in your long term plan.
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Krista DiBias
Okay. All right, we're going to go to some questions here. Clay in Kentucky sent this one in. I recently left a local law enforcement career for a federal law enforcement position. I was vested in the state managed retirement with a balance close to $60,000 that I can keep. It has a state guaranteed rate of return of 4% annually. I'm considering rolling this money over to my civilian tsp, a Roth that I now contribute to. This seems logical to me and has a higher probability of Greater returns in the future. I would love your insight on this and advice if there's an option I'm overlooking.
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Wes Moss
Clay, this is about opening up your options. The reality here is that it sounds like you have the state plan and it is in a structure where the only choice you have is a guaranteed option. And right now rates are pretty good. 4% is not terrible and it is guaranteed, but it sounds like you don't have the option for, let's call it equity stock type mutual funds. TSP should be able to give that to you. The Thrift Savings Plan has five really core options, common stocks, which are essentially the s and P500, very much like that small cap, international government fixed income and then general fixed income. And it does. It's not a big list, but they're super low cost options that can get you exposure to fight against inflation, whereas the guaranteed accounts probably not going to do that over time. So if it were me, I would want more optionality. You can still pick the conservative options within tsp, but it doesn't sound like you have any other options than the guaranteed rate in the current state plan. And you can move it into the TSP Roth. So it seems like you can do that. So if it were me, I would be choosing more options.
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Krista DiBias
Okay. John in Oregon says now that tax day has passed, I have a question about what you recommend for document retention after assets from a trust have been distributed, all tax returns have been filed and paid and the trust has been closed. Specifically, how long do you recommend that trustees or successor trustees keep the tax returns and keep all documentation supporting those returns?
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Wes Moss
All right, John, so this is a. We're talking taxes, tax returns and document retention, John, I would just say somewhere between seven years and forever, there is a rule of once you file your taxes, the IRS has three years to go back. But that's only if there's a lot of exceptions to that. And a lot of times they can go back seven years. So if it's for returns, I would be keeping them just in perpetuity. And we live in a world today. I mean, 10, 20 years ago, it felt much more difficult to do that. Today, everything is digital. We can save it, almost anything as a PDF, put it in a folder and a file on our PC and keep it forever. So I would say that we're in an age where it's easier than ever to organize and preserve. And I would just think about it as I'm keeping these things forever. So I would default seven years to forever.
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Krista DiBias
Okay, well that is going to do it for us today. If you have a question for Wes, you can go to wesmoss.com ask again. That's W-E-S-M-O-S-S.com ask. And Clark Howard will be back tomorrow with a brand new episode. And if you have a question for Clark, you can go to his website@clark.com and find our form there. Thanks and have a wonderful rest of your day.